Bollard likely to slash rates later this month

Reserve Bank governor Alan Bollard is likely to slash interest rates hard again later this month because of the impact the global credit crunch is having.

Thursday, October 2nd 2008, 12:38PM

by Jenny Ruth

All eight economists surveyed by Good Returns expect Bollard to cut his official cash rate (OCR) from 7.5% to 7% when he reviews it on October 23.

On September 11, Bollard surprised the market by cutting the OCR 50 basis points from 8% when most had expected a 25 point cut, citing a marked slowdown in household spending and a deteriorating global economy.

Jason Wong, an economist at First NZ Capital says in the wholesale interest rates market the 90-day bank bills are currently trading at 8.02% which is where they were trading ahead of the September OCR cut. The Reserve Bank needs "to deliver another 50 points just to get back to where we were," Wong says.

Robin Clements at UBS New Zealand says the latest twists in the global credit crisis and the increased downside risks to growth "could be used, validly, to justify more aggressive easing."

But he also thinks the central bank’s prime motivation with be to neutralise what would otherwise be a further effective tightening in monetary conditions.

Bank of New Zealand economist Craig Ebert, although he is also expecting a 50 point OCR cut, sounds a warning that recent business and consumer confidence indicators could be indicating renewed economic strength.

"It’s nothing rampaging, but it’s way back from the depths of despair of even a couple of months ago," Ebert says. Those indicators aren’t enough yet to convince him the tide has turned but he will be watching to see if they’re translated into figures such as retail sales – which may be boosted by the tax cuts which came into effect this month.

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OCR cut to 7.5% »

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